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Welcome to the 11th edition of the Weekly Wrap, where we love all economic data points equally, as if they were our own children.
Inflation: More Important than Jobs Data?
Update: 9am ET
A weak CPI reading. Core CPI for September was released, and came in at 1.7 percent, 0.1 percent lower than expected. Traders are now predicting an 82 percent chance for a December rate hike, down from 86 percent earlier this morning.
At 8:30 am (ET) this morning, we’ll get to see the updated Consumer Price Index (CPI) inflation number for September. The monthly jobs report has traditionally been the granddaddy of economic data. But this monthly inflation metric might be the new king of the heap.
- The Fed has a dual mandate: full employment and stable prices. Even with the hiccup in the September jobs report (-55,000 net jobs, the first monthly decline since 2010), the economy is pretty close to full employment.
- The stable prices mandate? That’s a different story. We’ve written about this several times recently (See: The Janet Yellen Paradox: When Raising Rates Doesn’t Equal Tighter Fiscal Conditions). Inflation has been persistently below the Fed’s 2 percent benchmark for years. Inflation, measured by CPI, has averaged 1.75 percent over the past 10 years.
- Low inflation has is the biggest source of disagreement within the central bank, according to the minutes from the September Fed meeting. Inflation was mentioned 90 times in the discussions. That’s more than 3x the number of mentions of “labor.”
Does this mean the Fed will hike rates in December?
According to the market, the answer is a resounding yes. Traders are pricing in an 86 percent chance of a rate hike in December. That’s up from about 70 percent on October 2 and 42 percent on August 18.
That’s in spite of the apprehensions of some Fed statements. Some members of the committee “noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective.”
Which brings us back to this morning’s CPI report. Would the Fed hold off on a December rate hike with low inflation readings? Probably not – low inflation hasn’t stopped the Fed from increasing rates before. But it is clear that monetary policymakers are keeping a much closer eye on the inflation side of the dual mandate.
What We Wrote This Week
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Other Links and Notes
Conor Sen argues in Bloomberg View that we should look past inflation – housing is the real crisis. (Don’t Worry About Inflation. Solve the Housing Shortage.;Conor Sen, Bloomberg View)
- “The more responsive approach would be to make it easier to build houses, to get public sector employers out of their recession-era mindsets to hire and pay more, and more generally, to ensure that millennial family needs are met by the public and private sector. The way to resolve a supply shortage in this case should mean creating more supply. Rather than hiking interest rates, the federal government should find ways to add construction workers, perhaps via worker training programs or immigration reform.”
Yanis Varoufakis, everyone’s favorite finance minister, argues that we shouldn’t let the Catalonia crisis go to waste. (Spain’s Crisis is Europe’s Opportunity; Yanis Varoufakis, Project Syndicate)
- “The Catalonia crisis is a strong hint from history that Europe needs to develop a new type of sovereignty, one that strengthens cities and regions, dissolves national particularism, and upholds democratic norms… But the longer-term beneficiary of this new type of sovereignty would be Europe as a whole. Imagining a pan-European democracy is the prerequisite for imagining a Europe worth saving.”
Workers quitting their jobs to seek out better ones. Could this be what’s holding back wage growth? (Record Job Openings Aren’t Enticing Workers to Quit; Eric Morath, Wall Street Journal Real-Time Economics)
- “The unwillingness to quit could be a factor holding back better wage growth, reflecting workers’ relative lack of bargaining power. It might also suggest other factors—such as the unwillingness to move for work, or satisfaction with work-life balance—is keeping workers in their jobs despite ample opportunities elsewhere.”
Cover photo: Brookings Institution (Flickr Commons)
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